Time lags in re-valuing assets to reflect higher interest rates and other risks in private credit could dent broader investor appetite and undermine Britain's financial stability, a Bank of England official said on Monday.

The BoE is developing policies to increase transparency of the non-bank finance - also dubbed shadow banking - that covers investment funds, insurers and other firms that provide credit. The sprawling sector accounts for nearly half the world's financial sector.

With links to private equity, private credit has grown four-fold since 2015 to around $1.8 trillion globally thanks to very low interest rates, but given poor data, the total could be much larger, said Lee Foulger, the BoE's director for financial stability.

"The sorts of business model risks we are focused on include the refinancing of existing debt in the context of higher rates, valuations, risk management approaches, liquidity and leverage," Foulger told a conference.

Most fund portfolios are typically valued quarterly and remain above their public-market peers, with some investors left possibly over-allocated to private markets.

"If material enough, these risks materialising could trigger a broader reduction in risk appetite that spills over to UK financial stability through financial markets, impacting on financing conditions for UK businesses," Foulger said.

Britain's Financial Conduct Authority has already begun scrutinising how valuations are being done, and the BoE's Financial Policy Committee will publish an assessment of risks in private credit in June.

"While the leverage deployed appears relatively low, the underlying investments are relatively higher risk and we lack sufficient data to fully understand their resilience to stress," Foulger said.

It was also difficult to identify the extent to which any losses could spill over to banks and investors, he added.

"Assessing the extent of the risks, or in which scenarios they might crystallise, is easier said than done."

(Reporting by Huw Jones, Editing by Louise Heavens and Chizu Nomiyama)